Do you imagine the balances due on various credit cards, and choose the one with the smallest outstanding debt? Do you mentally compare APRs and make the optimal financial choice? Do you calculate whether you actually need the product in your hands, versus its cost, versus the lost opportunity of using those dollars on something else?

Or do you just grab whichever card is on top of your wallet, and spend?

Most of the choices we make each day may feel like the products of well-considered decision making, but they’re not. They’re habits. And though each habit means little on its own, over time, how we spend our money — as well as the meals we order, how often we exercise, and the way we organize our work routines — have enormous impacts on our health, productivity, financial security, and happiness.

One paper published by a Duke University researcher in 2006 found that 45 percent of the actions people performed each day weren’t actual decisions, but habits. And it’s not just individuals. Procter & Gamble, Starbucks, Alcoa, and Target have seized on habits to influence how work gets done, how employees communicate, and— without customers realizing it — the ways people spend their money.

In the last decade, our understanding of the neurology of habit formation has transformed. We’ve learned how habits form within our brains — and why they are so hard to break. And as a result, we now know how to create good habits and change bad ones like never before.

At the core of this understanding is a basic framework that explains how your spending habits emerge — and how to change them.

RULE ONE: You must identify your habits
The tricky thing about habits is that they often feel almost unconscious. That’s because habits occur in a nearly unconscious part of our brain: the basal ganglia, one of the oldest neurological structures and the area where ‘unconscious thought’ occurs.

In the last decade, studies have taught us that there is a basic pattern at the core of every habit, a kind of neurological loop that has three parts: A cue, a routine and a reward.

To figure out how you spend, you have to identify your spending habits — the cues and routines and rewards — that drive how you handle money.

As an example, let’s say you have a bad habit, like I did when I started researching my book, The Power of Habit, of going to the cafeteria and buying a chocolate chip cookie every afternoon. Let’s say this habit has caused you to gain a few pounds. In fact, let’s say this habit has caused you to gain exactly 8 pounds.

How do you start diagnosing and then changing this behavior? By figuring out the habit loop. And the first step is to identify the routine. In this cookie scenario — as with most habits — the routine is the most obvious aspect: it’s the behavior you want to change.

My routine was that I got up from my desk every afternoon, walked to the cafeteria, and bought a chocolate chip cookie and ate it while chatting with friends. So that’s what I put into the loop:

When it comes to spending money, something similar often occurs when people walk into a store, or feel hungry and pass a fast-food restaurant, or receive their paycheck and automatically decide how much to save for the future and how much to spend next week. A routine takes over — and they act, almost unthinkingly, in ways that either fatten or deplete their bank accounts.

To take control over these habits, you have to identify them. And to do that, you need to look for patterns in your spending. Download your credit card data and ask yourself:

When do you spend? Is it more often on weekdays or weekends? Mornings or afternoons?

Do you make a few big purchases or a lot of small ones?

Do you spend more when you are with your friends or alone?

It won’t take long to find some basic patterns — and those patterns will highlight the routines that shape your financial life.

Next, some less obvious questions: What’s the cue for this routine? Is it boredom? Genuine needs like food and rent? Do you spend to socialize or entertain yourself on your own? Do you crave the things you buy, or the shopping experience itself?

To diagnose my cookie habit, I had to ask myself some similar questions. Was I eating because I wanted the cookie itself? A temporary distraction? Or the burst of energy that comes from that blast of sugar?

To figure this out, you need to do a little experimentation.

RULE TWO: Look for rewards
Rewards are powerful because they satisfying cravings. But we’re often not conscious of the cravings that drive our behaviors.

To figure out which cravings are driving particular habits, it’s useful to experiment with different rewards. If you, like me, were trying to change a cookie habit, I would suggest that on the first day of your experiment, when you felt the urge to go to the cafeteria and buy a cookie, you should adjust your routine so it delivers a different reward. Go outside, for instance, and walk around the block, and then go back to your desk without eating anything. The next day, go to the cafeteria and buy a donut, or a candy bar, and eat it at your desk. The next day, go to the cafeteria, buy an apple, and eat it while chatting with your friends. Then, try a cup of coffee.

You get the idea. What you choose to do instead of buying a cookie isn’t important. The point is to test different hypotheses to determine which craving is driving your routine. Are you craving the cookie itself, or a break from work? If it’s the cookie, is it because you’re hungry? (In which case the apple should work just as well.) Or is it because you want the burst of energy the cookie provides? (And so the coffee should suffice.) Or, are you wandering up to the cafeteria as an excuse to socialize, and the cookie is just a convenient excuse? (If so, walking to someone’s desk and gossiping for a few minutes should satisfy the urge.)

Spending is the same way: when you would normally spend away, try something else. One day, when you would normally take a break by buying an expensive latte, have a diet coke instead. The next day, take a walk and don’t buy anything.

By experimenting with different rewards, you can isolate what you are actually craving, which is essential in redesigning the habit. In my case, when I went to a colleague’s desk to gossip for a few moments, I found the cookie urge disappeared. What I was really craving, I realized, wasn’t cookies, but socialization. That was my habit’s real reward:

RULE THREE: Isolate the cue
Experiments have shown that almost all habitual cues fit into one of five categories:

Location

Time

Emotional State

Other People

Immediately preceding action

So, if you’re trying to figure out the cue for the ‘going to the cafeteria and buying a chocolate chip cookie’ habit, you write down five things the moment the urge hits (these are my actual notes from when I was trying to diagnose my habit):

Where are you? (sitting at my desk)

What time is it? (3:36 pm)

What’s your emotional state? (bored)

Who else is around? (no one)

What action preceded the urge? (answered an email)

After just a few days, it was pretty clear which cue was triggering my cookie habit — I felt an urge to get a snack at a certain time of day. The habit, I had figured out, was triggered between 3:00 and 4:00.

Similarly, when you spend (or save), write down those five things. What is triggering an unnecessary flow of dollars out of your account?

RULE FOUR: Have a plan
Once you’ve figured out your habit loop — you’ve identified the reward driving your behavior, the cue triggering it, and the routine itself — you can begin to shift the behavior. You can change to a better routine by planning for the cue, and choosing a behavior that delivers the reward you are craving. What you need is a plan.

A habit is a formula our brain automatically follows:

When I see CUE, I will do ROUTINE in order to get a REWARD.

So, I wrote a plan of my own:

At 3:30, every day, I will walk to a friend’s desk and talk for 10 minutes.

It didn’t work immediately. But, eventually, it got be automatic. Now, at about 3:30 everyday, I absentmindedly stand up, look around for someone to talk to, spend 10 minutes gossiping, and then go back to my desk. It occurs almost without me thinking about it. It has become a habit.

Changing some habits can be more difficult. But this framework is a place to start. Sometimes change takes a long time. Sometimes it requires repeated experiments and failures. But once you understand how a habit operates — once you diagnose the cue, the routine and the reward — you gain power over it. And study after study shows that the same is true with spending and saving: Once you figure out the cues triggering unnecessary spending, and the rewards it is delivering, the behavior can be changed. Once you learn to create cues and rewards to encourage automatic saving, studies say, our savings accounts expand.

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hard article to read, which is a good thing. sluggish commenting isn’t lack of interest i hope.

question: is it possible to have a habit where there is no cue at all, or possibly where just about anything can work as a cue, not even an emotion or state of mind, no cue at all? would it possibly be more an addiction than a habit in that case, or is there a cue even then?

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Sherry Love

Cue-Routine-Reward. That sounds simple but it will take quite a lot of work to apply it to spending habit.

The tedious and frightening part is to look at credit card statement and try to see the pattern. Sometimes, the balance and the APR don’t look as intimidating as realizing one has spending problems. I think that’s why it’s so easy to get into debt and so hard to get out of it.

By ignoring to realize that one has problems, one is hoping that the problem will go away on it own, but it actually stay and eventually becomes a bigger problem. It’s like a cycle of doom.

That’s my 2 cents.

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ImJuniperNow

Please explain to me how your boss lets you get away with 10 minutes of gossiping.

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Tabitha (a.k.a. Penny)

It is amazing to me how psychological spending can be. Thanks for the great article. I shared it with my readers and pinned it.

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Julie M.

Great article! I love the step-by-step instructions with the very clear and releatable example. You took a difficult idea and turned it into something that feels within reach for most of us. Thanks!

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Amanda

Thank you for the article. It is very nicely written. I appreciate the graphics. I’m not sure how to apply this to my life but it was an outstanding article nonetheless.

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getagrip

I think the biggest thing you did was not so much get rid of a habit but change it to your advantage. So many times we when thing of a bad habit we think of “quiting” the habit, which is really much harder than changing it.

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Maggie@SquarePennies

Something I found interesting about shopping habits was what I learned by using Pinterest. Instead of shopping online, which I love to do, I went to Pinterest instead. The act of choosing items to categorize there seemed to substitute well. It was a way to express my taste and interests, similar to shopping. Also it’s a visual experience, similar to shopping. The act of categorizing pins to my boards was somehow satisfying also. Then when I looked back at my choices on my boards I felt happy (reward). After all, I was looking at only things that I liked. The entire experience can be somewhat addicting, but it doesn’t cost money. So I saved money comopared to shopping, even if I lost some time. Plus I learned new ways to DIY and save money. Overall, a good deal! By the way, I’m not an employee of Pinterest!

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BARBARA FRIEDBERG

Charles, After reading the article I was certain you were a cognitive behavioral psychologist. What a surprise when I found out you are a writer. This article left me wanting more. Your book just moved up from “must read later” to “must read sooner.” Wonderful preview, thanks.

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Felicia

Great article! I look forward to giving this a try for one month and assess my decisions vs. my habits. Should be interesting.

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Jenna, Adaptu Community Manager

Interesting idea, that purchases aren’t decisions, but just habits. I’m going to track my purchases this week and see if that is true for me.

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Carl Lassegue

I really enjoyed this article. The hard part for me was always to identify the reward for some habits. It’s going to be a lot easier with these steps. Thank you for the tips.

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Lori Blatzheim

This is a creative and unusual post. I have to truthfully admit that I didn’t absorb the entire piece on the first try.

I plan to sit down in a quiet space and read it carefully.

Thanks for the challenge.

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chacha1

Great stuff. I particularly appreciate that you focus first on the routine – what the habit IS – then on the reward, and only then look for the cue.

A lot of people focus on the wrong end, I think, and never figure out what they are actually trying to achieve – with spending, with weight management, with a lot of things.

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Marsha

I’ve read the Power of Habit and thought it had some helpful insights about changing bad habits into good ones. One thing I wondered about the cookie example though–changing the cookie habit to the gossiping with a friend habit is not necessary changing a bad habit into a good one. You may be interrupting the friend’s work, and gossip is frequently not harmless.

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victoria

True, but if Charles and his partner in crime decide that the interruptions are a problem, that can be tackled later. It is (or at least, it can be) an iterative process. In this scenario the immediate problem was the cookies and the associated weight gain, and his way of figuring out how to get what he needed from the habit was clever.

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Winterlady

Just finished the book and I highly recommend it.A good tool for change.

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Allison

I just read The Power of Habit this weekend and loved it! Last night after finishing, I sat down with my husband and made a list of all of the habits we have – eating out when we’re too tired to cook/there’s nothing in the fridge, sitting at home on the couch almost every weekend (we sound like real winners, right?) and a list of the habits we want to have – writing a few times a week, running/exercising regularly, etc. Thanks for the great post! I downloaded the sample from Willpower onto my Kindle too, and I’m going to buy it next. Although “buying too many books on my Kindle” may soon become another spending habit I’ll have to modify!

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Kathleen @ Frugal Portland

This sounds like a good way to give yourself the opportunity to hit “reset” and change a habit, or at least transform your 3:30 cookie to a 3:30 walk around the block.

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Jacq

Charles, I just bought your book a couple of weeks ago and am halfway through – I LOVE it! 5+ stars!

Kelly McGonigal’s book “The Willpower Instinct” was also very good. It was much better than Baumeister and Tierney’s “Willpower” in terms of take-aways and actionable steps.

Although I don’t have any oblivious spending habits anymore (modified using methods similar to those you cite), I did have a “come in the door and go for a glass of wine” habit that was easy to break when I realized I was just looking for relaxation.

Thanks again.

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Lucy at Money Sparrow

I think this may just change everything!

So often personal finance is seen as dull because we assume it requires nothing but willpower, which is boring and hard, but this is a proper explanation of how to break a habit. It’s great to see experimental research summarised, interpreted, and turned into advice we can use to reach our goals. I have no doubt I’ll be using this strategy soon, thank you.

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Laura

I just finished “The Power of Habit” and loved it. Highly recommended. I’m still trying to implement the habit-changing steps noted here and in the book; not as easy as I’d like! I think I need to check out “Willpower”. 🙂

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Stephen

Anyone who goes to a cash register and then “choose the one with the smallest outstanding debt” needs to stop the purchase, go home, and cut up all their cards. You shouldn’t be carrying a balance and if you get to the point where you are wondering which card has the lowest one, then you have already lost the WRONG battle.

Probably a bad way to start an otherwise good article with a valid point.

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Chase

It’s a great way to start it. They know what they SHOULD do, but have a bad habit of abusing credit.

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TB at BlueCollarWorkman

And when it comes to spending, I think it can be even harder to identify the ingrained habits becuase they’re habits and they’re so ingrained! They’re second nature, like breathing, and who usually focuses on breathing? But looking at credit card statements or being extra conscious of all spending should work to wake us up to habits!

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Sam

I’m with Nicole, I’m reading Willpower, but Habits is also on my list.

I think another issue that is touched on in other books, The Happiness Project for one, is whether one is an abstainer or a moderator. Meaning do you do better, say on a diet, by going cold turkey and throwing out any junk food or treats in the house. Or are you a moderator, in that you will do better on a diet, if you can have a cookie once a week or every other day.

Over time I have figured out that I am a moderator, that is why our allowance system works best for me. My husband is an abstainer so the allowance system works for him as well because he is limited by how much he can spend (he will spend as much money as is available to him, just like he will eat a whole bag of chips).

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Elizabeth

I think that’s an important distinction. I think in Willpower (spoiler alert!) the authors also say that having clear boundaries is important. Making a goal like “I’ll eat less” or “I’ll have a treat in moderation” isn’t helpful because it’s too open to interpretation. (What is “less?” What is “moderation”?) If you say “I’m allowed a cookie twice a week”, the goal is more specific.

I enjoyed Willpower. Habits is on my list too 🙂

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Nicole

I haven’t read the book yet, but it is on my list (after um, Willpower). I really enjoyed your NPR interview!

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20’s Finances

It’s amazing to hear one study’s results on how many of our actions are a result of habits. While I think it’s helpful for people to change their spending habits and to be more mindful of their actions (as they affect their finances), I think having some habits (even bad ones) is healthy and can allow them to focus their mind on more important things than where they shop or what they buy.

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Elizabeth

I was thinking the same thing 🙂 I think GRS has an earlier post on decision fatigue, and habits are one way of helping our brains cope.

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Anthony @ EachPesoCounts

Right!

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Colin

Hi 20’s Finances,

I think the habit of changing habits can also be a reward. Studies have shown that if a person feels in control of their life, they are happier and less stressed. By taking control of a bad habit and replacing it with a equally rewarding good habit we are elevating how we feel about ourselves and change the ‘story’ we tell ourselves about who we are.

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